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Understanding Third-Party Liability Risks

Better safe than sorry


In Alberta’s largest city, Calgary’s urban life is juxtaposed against vast wilderness. Whether located on the paved streets of downtown or on the snow-covered slopes of a majestic peak, however, local businesses must deal with the same ever-present risk of third-party liability.  


Third-party liability refers to the legal obligation of a business to compensate for injuries or damages incurred by customers, clients or other third parties due to the companys actions or negligence. 


But just because a business seems safe on the surface, as compared to, say, a ski resort – where customers are constantly at risk of physically injuring themselves – doesn’t mean that the risk of third-party liability isn’t there. In fact, if a business doesn’t take the right steps to protect itself, it might be even more exposed, where one simple mishap could unravel into a legal maelstrom threatening the very survival of the company. 


As businesses strive to grow and serve their communities, understanding and managing third-party liability risks thus becomes not only a matter of legal compliance, but a crucial strategy for long-term success, especially in a place like Calgary, where unseen dangers – from E. coli and pollution to avalanches and Grizzly bears – can pop up when least expected. 


Perhaps the most famous third-party liability lawsuit of all time is the 1994 U.S. court case Liebeck v. McDonalds Restaurants. Popularly known as the McDonalds coffee case, a woman who suffered third-degree burns after spilling hot coffee purchased from a McDonalds drive-thru onto her lap was awarded compensatory and punitive damages based on the premise that McDonalds failed to warn customers adequately about the temperature of the coffee and the risk of severe burns. 


According to Alison Gray, Calgary-based Partner at Gowling WLG, an international law firm, “While there aren’t many ways to protect against a lawsuit being filed against you, there are two things a company can do to assist it. The first being to undertake an internal risk assessment to determine where they may be vulnerable to such lawsuits, after which they can ensure best practices are drafted and implemented.”  


Gray continues, “The second, which is related to the assessment of risk, is obtaining insurance products that can provide assistance with the defence. For example, by appointing legal counsel and paying legal costs and/or providing coverage should the company be found liable at the end of the day.” 


But third-party liability risks are diverse and can arise in numerous scenarios that can’t be easily predicted. For instance, a customer might slip and fall on a wet floor in a retail store, leading to injury and a potential lawsuit. On a construction site, a passerby could be harmed by falling debris. In the service sector, a client might suffer financial losses due to professional advice that was negligently provided. 


The consequences of such incidents can be severe, ranging from legal fees and compensation payouts to reputational damage and loss of business. So, what can a business do to protect itself against third-party liability risks? 


Gray says, “Waivers are intended to be legally binding contracts in which an individual waives a right to bring a lawsuit for any injuries or losses sustained during an activity or event. As a general rule, to be enforceable, a waiver or assumption of risk requires the company seeking the waiver to take reasonable steps to bring the waiver to the customer’s attention before the contract is made; the provider must ensure the customer understands the waiver, and the waiver must be clearly stated.” 


As such, it’s essential for businesses to work with legal professionals to ensure that their waivers are well-drafted for a specific industry and comply with local laws. “The difference between a ski resort and someone slipping in a retail store really relates to the type of business each is engaging in,” Gray explains. “Ski resorts are in the business of offering an inherently risky activity, while a retail store is in the relatively risk-free activity of selling goods. The question really comes down to assessing the nature of the business and the associated risks of engaging in that business.” 


Making matters more complicated, not all businesses can ask their customers to sign a legal document. That’s where third-party liability insurance comes in. Gray says, “There are no real downsides to third-party liability insurance. Conducting a risk assessment will ensure a company has the right insurance coverage, as insurers will not provide coverage claims that are not in fact covered by the policy.” 


In the event of a lawsuit, the insurance policy can cover legal fees, settlement costs and any awarded damages, up to the policys limit. This is crucial for a business, as “Class actions can be very costly for a business,” Gray notes. “If a company does not have any third-party liability insurance to contribute to the cost of defending the lawsuit and damages, depending on the size of the company, a class action could amount to ‘bet the company’ litigation, meaning the litigation could bankrupt the company.” 


The most proactive approach is to prevent incidents that could lead to third-party liability claims from occurring in the first place. “Employee safety training is always beneficial,” according to Gray. “Employee safety training doesn’t necessarily protect against third-party liability, but it certainly has the potential to reduce the nature and extent of injuries and thus, any ultimate liability.” 


Regular training sessions, clear communication of company policies and active supervision can help ensure that employees are aware of their responsibilities and the potential consequences of negligence. Additionally, fostering a culture of accountability and safety can further mitigate risks and protect a business from liability claims – something Boeing’s CEO probably wishes he had done more of, as he’s now being forced to step down in the wake of several incidences of failed quality control. 


Local Calgary artist Mandy Patchin taught glassblowing classes for eight years out of Canada’s only mobile glass studio – Glass House Xperience. On top of making her students sign waivers, she emphasized the importance of safety: “I followed very strict safety practices and in all my years of teaching, nobody ever hurt themselves.” 


Even though she never had to file a third-party liability insurance claim, Patchin says, “You definitely need to have insurance. But I think the insurance company thought it was higher risk than it actually was,given that a glassblowing furnace reaches temperatures of over 1,000 degrees Celsius.  


This might explain why her liability insurer dropped her after 7.5 years without explanation. “I never made one claim,” Patchin says. “They just decided it was too much of a risk.” 


Patchin went on to find another insurance provider, but eventually sold her mobile glassblowing company, saying, “Insurance was part of the reason it was a challenge to operate the business.”